Concerns about risk adjustment impede efforts to evaluate quality of care and establish fair reimbursement levels for health plans and providers. For quality assessment and setting payments, risk adjustment aims to counteract incentives to avoid sick and disabled persons. Despite important methodological questions, the 1997 Balanced Budget Act requires Medicare to risk adjust capitated payments by 1/1/00; the President's Advisory Commission on Consumer Protection and Quality has called for improving risk adjustment. This project will examine risk adjustment methodologies for both payment and performance measurement. This study will examine risk adjustment methodologies for both payment and performance measurement. This study will involve two components: (1) statistical analyses; and (2) case studies to understand the views of stakeholders and role of risk adjustment in the health care marketplace. The statistical analyses will examine the leading risk adjustment methodologies: Ambulatory Care Groups (ACGs); the Clinically Detailed Risk Information System for Cost (CD-RISC); the Diagnostic Cost Groups Hierarchical Condition Categories (DCG-HCC); and the Disability Payment System (DPS). We shall use three data sets: (1) enrollment and encounter records submitted for risk contracts" (i.e., capitated) by three large insurers in eastern Massachusetts for two large, integrated health carte delivery systems, CareGroup and Partners HealthCare System (over 500,000 covered lives); (2) for person receiving primary care at affiliated academic medical centers, these administrative records supplemented with clinical information from electronic reporting systems (e.g., laboratory, pharmacy, computerized medical records); and (3) Medicaid claims and encounter records from four states. We shall conduct case studies about current uses and stakeholders' views of risk adjustment at 12 markets nationwide that are current being intensively tracked by the Center for the Study of Health Systems Change. The project's outcome will be methodological recommendations about risk adjustors, guidance about statistical approaches for evaluating their performance, suggestions about data requirements, and advance about addressing risk adjustment with various stakeholders' and implementing it for practical applications.